Next has always been a well-run, healthy business that delivers shareholders good, solid returns.
However, boss Lord Wolfson admits that although it outpaces inflation, the 5.4% compound annual growth rate it has delivered for shareholders over the past 8 years is “unexciting” for investors.
Now, Wolfson and co have some new ideas that should power further growth at the business.
“As it stands today the group has far more ideas and opportunities for long-term growth than it has had for some time,” he says.
In fact, it has acted on one of those opportunities – taking equity in other brands – this week when it snapped up Cath Kidston for £8.5m.
That’s not to say, the retailer is resting on its laurels in terms of its core business. Wolfson is clear that “the growth parts of the business are ultimately the froth and not the beer”.
In fact, he plans to improve product ranges to extend the Next brand’s reach, improve its online service levels, boost efficiencies and get more value from its technology investment.
But, it is also investing in some very interesting routes to future growth. What are they?
Hitting the acquisition trail
Next has been snapping up retailers over the past couple of years, adding brands including Joules, Reiss, Made.com, JoJo Maman Bebe and Swoon as well as taking stakes in the UK franchises for Victoria’s Secret and Gap.
And it’s not stopping there. Taking equity stakes in businesses is one of its plans for growth.
Wolfson says the acquisitions it makes are “purely driven by opportunity”.
“It’s not strategic in the sense that we’ve got to have this brand or that brand. We are only going to buy brands if we think there’s a market opportunity.”
He adds that it has no set budget for M&A – “what should decide the size of the budget is the size of the opportunity” – but says that cash isn’t a constraint as Next, which beat profit expectations in its full year, is very cash generative.
Next has no set shopping list in terms of categories of would-be acquisitions and Wolfson says it simply wants to “invest in great brands, with great management at the right price, where we can add value”.
Many of its acquisitions to date have been brands in distress. Its most recent purchases, Cath Kidston, Made.com and Joules, have all been bought out of administration.
Rising costs and dampened consumer spending have created a punishing environment for retailers, which should see other brands seeking emergency funding. Next is expected to hoover up other businesses that fit its criteria in the year ahead.
Total Platform
The reason Next has been snapping up so many businesses is to plug them into what it terms its Total Platform.
The retail giant offers its ecommerce, fulfilment and marketing services to third party brands for a fee.
Next says its infrastructure can “deliver expectional levels of growth without operational friction and step changes in their capital expenditure”.
For a percentage of their turnover, brands can benefit from Next’s best-in-class offer that includes next-day delivery on orders before 11pm, an AI driven search engine and intelligent product recommendations.
However, the retailer decided that it should take stakes in the brands that join its Total Platform as it believes the value it creates for clients will exceed the profit it would generate for Next as a service provider.
In fact, so far, Next has made more profit from its equity investments than the service.
Launching new brands
Another opportunity that Wolfson wants to exploit is the launch and license of new brands. He used the example of Love & Roses, a boutique-inspired brand launched in early 2021.
The brand, led by former Oasis design director Clive Reeve, stocks dresses, jumper, cardigans, hoodies, shirts and loungewear in feminine colours and modern prints.
More licensed products, like its Baker by Ted Baker kidswear range have also been identified as an opportunity.
Overseas expansion
Next may be a mature business in the UK, however, there is much international growth to go for.
The retailer has grown its overseas business from “very little” to more than £750m sales over the past 10 years, according to Wolfson, however this has largely come from Europe and the Middle East.
The Next boss points out that these territories account for just 26% of the world’s consumer spending, but make up 87% of Next’s sales.
“The question we’re now asking is could the brand have traction in Asia and the Americas. In order to do that we have to look at different models of trading,” he says.
To avoid costly shipping charges of moving stock from suppliers in the Far East to the UK and then on to customers in the Americas and Asia, it plans to experiment with models that involve collaborating with local retailers through wholesale, franchise or license.
Wolfson admits this will be lower margin but will help it exploit the big opportunity it has overseas.
He says “lots of very interesting conversations” were being had with potential partners and it will trial all new approaches in a number of territories over the coming years.
Future growth
Despite the year ahead being challenging – Next is forecasting a small sales decline and a £75m hit to profits – Wolfson is confident that it is on the path for future growth.
“Looking through next year to the longer term our prospects feel more positive than they have done for some time…the group is also laying the foundations for new avenues of growth to complement and leverage our heartland business.
There have been many new categories and developments that have made Next one of the most successful and resilient businesses in retail.
Wolfson lists the development of its home business, its website launch, and expansion of its retail footprint as key moments in its history.
It feels like the new initiatives he has outlined could well be another landmark move.
“Is this a pivotal moment?” asks Wolfson. ”We will know in five years’ time.
“None of these things have looked big through the windscreen, they’ve only ever looked in the rear mirror.”
If Next can drive home some of these new growth avenues, it will turbocharge the safe and steady business into one of the most exciting stocks in retail.
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